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In my November 23, 2004 E-Letter, I discussed some of the very basics of sound financial planning.  I had a number of readers respond to that article thanking me for the advice, and many said they were going to send it on to friends and family who could use the information.

I was quite surprised at the response, since what I had written was very elementary and not little-known “secrets to success.”  To recap, I said that you need to set specific financial goals, start a disciplined saving plan, build a targeted cash reserve, eliminate debt and obtain appropriate amounts of insurance. 

From the response I received, it is clear that there are many people who have either never heard of these basics, or who have ignored them until now.   In days past, these basics would either have been taught in the home or learned by following the parents’ example.  Unfortunately, many of today’s young people were brought up in homes that did not teach or practice sound financial planning, so they have had to pick this information up on their own.

In this week’s E-Letter, I’ll expand upon the basic financial planning advice in the prior installment of this series.  Where the first installment focused on setting goals, saving and debt management, this next set of fundamental planning tips will delve into slightly more advanced topics such as home ownership, tax qualified savings opportunities, and how to start a program of investing.

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Buy A House

Shelter is one of the basic needs of life, and a home is typically the largest purchase most people ever make.  Notice that I didn’t say the largest “investment” most people ever make, because a home is not really an investment to most people.  An investment can generally be liquidated in favor of another investment or if you need the money, but if you sell your home, you have to immediately start looking for alternative shelter.  In addition, while many people have homes that have appreciated significantly through the years, most will die in their homes without cashing out this significant increase in value.

Even though I do not consider a home to be an investment per se, I do think that you should purchase your own home once you have sufficient income and assets to do so.  That way, you begin to build equity with part of the monthly budget that formerly went to rent expense.  Home ownership also has major tax advantages, as well as more intrinsic values such as putting down roots and becoming part of a community.  However, there are many factors that affect how and when you should buy a home, as I will discuss in more detail below.

Home builders, real estate agents and the banking industry are all telling you that now is the perfect time to buy a home, in light of very low long-term interest rates.  On the other hand there is the gloom-and-doom crowd warning (as always) that there is a “housing bubble” and that buying now will guarantee that you will lose money in the future.  Who’s right?

I think the answer lies somewhere in between these two extremes.  If you are going to buy a home, it’s best to do so when both housing prices and interest rates are accommodating.  However, waiting for this perfect alignment of the moon and stars may mean that you miss out on an ownership opportunity.

For example, I recently heard from one of my readers who had moved from Virginia to California seven years ago.  At that time, a relatively small house was priced at over $200,000, and this reader felt that housing was in a bubble and put off buying at that time.  Now, seven years later, the same homes are selling for over $500,000.  Thus, my reader missed out not only on a less expensive home, but also the real estate appreciation that occurred.

I generally recommend that you buy a home if your savings and credit rating will allow.  Home ownership is a way for you to start building equity for yourself rather than your landlord.  Plus, you have to live somewhere, so even if your home declines in value after you move in, it still satisfies your need for shelter.  Should home prices decline in your area, they probably won’t stay that way forever.  Since a home is usually a long-term commitment, it’s possible that prices will rebound by the time you want to sell.

I do NOT advise buying a home if your credit rating is impaired to the point that you will be paying a much higher rate of interest than the going rate.  I know of some people who were paying double-digit interest rates on homes even while long-term rates were at their lowest.  In such cases, they are paying the bank or mortgage company a premium to compensate for their lower credit scores.  It is my opinion that you should clean up your credit and then look for a home, rather than the other way around.

Some people are putting off buying a home because they received a direct mail piece or heard a talking head on TV saying that we are in a nationwide “housing bubble.”  Don’t listen to this nonsense.  Real estate values are often affected more by factors that are specific to the geographic region of the country you live in rather than nationwide factors.

There are some regional areas where housing is overpriced, some where it is a bargain and still others where the pricing is about right.  Therefore, you need to research the condition of the real estate market in your local area before making a decision.   I recommend that you check with your local real estate professionals rather than listening to someone trying to paint the nationwide housing market with one broad doom-and-gloom brush.  You might also consult your local Chamber of Commerce or a nearby college or university’s economics department for information on real estate in your area.

There is obviously a LOT more I could write about buying a home, but space does not permit.  While this advice regarding buying a home is not intended to be exhaustive, it should get you started on your way to home ownership.  I’ll also admit that there are times when renting is a better option than buying, such as when your housing needs are short-term, or market prices in a regional area are overpriced or in decline.

Maximize Tax-Qualified Savings

Once a cash reserve is established and installment debt is eliminated (or at least under control), maximize your participation in tax-qualified savings plans provided by your employer.  The term “tax-qualified” simply means that you receive special tax treatment on contributions and/or earnings within these plans.  There are various types of contributory plans available to employers such as the 401(k) plan, Thrift Plan, or SIMPLE IRA.  All of these programs allow you to save for your retirement on a tax-advantaged basis, and you should take maximum advantage of them.

Here is how these plans work: you agree to have a specified amount of your compensation placed into the plan, preferably the maximum amount allowed.  Every penny you put in is on a pre-tax basis, meaning that you do not pay current income tax on the portion of your pay that you elect to defer.  So, in effect, the government is temporarily subsidizing your retirement savings.

The contributions go into your account and are invested according to your instructions.  All earnings (investment profits) your contributions receive are also not currently taxed.  In addition, many employers match part of their employees’ contributions, creating an automatic increase in your account.  Some employers, such as my company, match 50% or more of employee contributions, subject to certain maximums.

All of the money you contribute, plus the earnings on your investments in the plan, grow tax-deferred, typically for a period of many years during a career. At retirement, you will pay taxes on the amounts you withdraw from the plan.  However, there are a number of alternative ways to withdraw your money, so you can select the option that best fits your personal financial situation.

Some employers sponsor more traditional kinds of pension plans where employees are not required to contribute part of their pay to receive retirement benefits.  In such cases, some of these plans allow you to contribute after-tax dollars that grow tax-deferred.  There are also retirement plan alternatives for self-employed individuals that allow entrepreneurs to defer more than they can in an IRA, even if they have no other employees.

Once you determine what tax-qualified retirement plans are available to you, maximize your contribution to these plans in order to get the most benefit.  This is especially true if your employer matches part of your contributions.  Employees over 50 years of age are also allowed to make “catch-up” contributions that increase the maximum even more.

If you would like to put more money into your retirement plan, but cannot do so because of the applicable maximum contribution limits, consider opening an IRA account.  Your contribution may or may not be deductible, depending upon your situation, but the earnings in the IRA grow tax deferred until you withdraw them at retirement.

Another thing to consider in 401(k) plans that allow you to manage your own assets is how much to allocate to the stock of your employer, if this option is available.  Some employees feel that it is disloyal to invest in anything other than the stock of their employer.  However, my advice is to avoid putting all of your money into any one basket, especially employer stock.  Sure, many of the employees at Dell and Microsoft got rich, but the ones at Enron and Worldcom didn’t.  So, diversify your investments unless your employer’s plan doesn’t allow you to do so.

Keep in mind that maximizing your contributions to a retirement account does not necessarily mean you are saving enough to fund the kind of retirement you want.  You need to compare your current retirement plan savings to your future needs.  There are a number of excellent retirement calculators on the Internet that will allow you to project the value of your current retirement plan contributions, and then compare them to your target retirement goal.  I have listed a few of these online calculators in the Resources section below.

Many retirement calculators factor in an assumed level of Social Security benefits when determining the amount of money needed for a comfortable retirement.  I think that’s a mistake, unless you are within 10 to 15 years from retiring.  Major changes to the Social Security program are now being debated, and while I don’t believe the program is going away, I do not think it will look the same in 15-20 years as it does today. 

Therefore, I recommend that my clients under age 50 ignore any potential Social Security benefits, and plan to meet their retirement needs solely from employer-provided retirement plans and/or their own personal savings and investments.  That way, if they end up getting any Social Security benefits in the future, that’s gravy.

One final word of advice – don’t divert all of your personal savings to tax-qualified savings.  When your contributions go into a tax-qualified plan, they are generally held there until you retire, die or become disabled.   Where access to funds is permitted, severe tax penalties exist to discourage tapping into your retirement funds.  Therefore, it is always important to have personal savings IN ADDITION TO tax-qualified savings, so that you have sufficient funds in case of a major purchase or emergency.

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Roll Over Any Retirement Plan Distributions

On the subject of retirement plans, statistics show that you may work for several different employers during your working lifetime.  Each time you change companies, you will likely receive a distribution from your retirement plan with that company.  Normally, you receive a lump-sum payment of all your money that was in the company’s plan, and you have a specified amount of time to reinvest that money in another tax-deferred plan.  

Unfortunately, statistics show that many employees who change jobs and receive retirement plan distributions spend them rather than rolling them over into their new employer’s retirement plan or a “Rollover IRA.” You should never - NEVER EVER - take these funds and spend them. 

In my December 30, 2003 edition of this E-Letter, I gave an example of a “million dollar boat.”  The idea was that spending what seemed like a small retirement plan distribution could cause the recipient to miss out on what those distributions could grow into had they been rolled over and wisely invested.

If you receive a distribution from a retirement plan, no matter how small it is or how young you are, you should roll that money over into your new employer’s plan, or into a Rollover IRA to maintain tax deferral.  These funds could be essential for your retirement.

Whenever possible, you should elect to have the distribution sent from your old plan directly to your Rollover IRA or the new employer’s plan.  You can get a check for your distribution and roll it over in 60 days, but doing so requires your former employer to withhold 20% of your distribution and send it to the IRS.  You can still roll over the entire amount, but you’ll have to replace the 20% that was withheld from your personal savings.   Sure, you’ll get the 20% back, but only after you file your taxes and get your refund.

Retirement plans are very complex and sometimes the materials furnished by employers to explain the plans are as confusing as the plan itself.  If you have questions regarding your retirement plan, you need to discuss them with your Human Resources Dept. or your employer directly if they do not have an HR Dept.

If they are unable to help, feel free to call any of the knowledgeable Investor Representatives at ProFutures.  These members of my staff are familiar with the various types of retirement plans and can help answer many retirement planning questions.  You can reach them by calling toll-free 800-348-3601.

Begin A Regular Program Of Investing

Once you are maximizing personal and tax-qualified savings, begin a program of investing your money.  However, this doesn’t mean that you should suddenly convert all of your cash reserve and savings to investments.  Since investments have varying levels of liquidity and risk of loss, you always want to maintain your cash reserve in a risk-free, liquid account.

It is also important to note that saving and investing are not the same thing.  If you take part of your savings and put it into a certificate of deposit (CD), that’s not investing.  Instead, that is just saving in a different type of vehicle.  Saving usually refers to risk-free alternatives that provide little or no growth over and above inflation.  Investments, on the other hand, target growth above inflation, with the potential for return directly proportional to the amount of risk taken.  In other words, investments with higher potential returns also carry the risk of larger potential losses.

For the beginning investor, the investment focus needs to be narrow.  The worst thing that can happen, in my opinion, is for a new investor to take on too much risk and lose all or a substantial portion of their investment.  This could have repercussions on all future investments and lead to a lifetime of risk avoidance and lower than needed returns.  Therefore, my recommendation for beginning investors is to stay with mutual funds.

Before embarking upon any investment program, you first need to know what your goals and risk tolerance are.  Since I covered setting goals in my first installment of this series, I’m going to assume you know what those are.  However, knowing your own risk tolerance will help to identify the best investment alternatives to get you to your goals.

When talking about risk tolerance, what I mean is how much money could you lose without it affecting you emotionally.  Some people cannot stand the risk of losing any of their investment principal, while others are willing to risk a substantial loss in exchange for the potential for larger returns.  Just remember that most investments will lose money at some time, so you need to set your risk tolerance at a realistic level so that you are not continually switching assets because of small losses.

Risk tolerance is an individual thing and must be measured on a case-by-case basis.  Some investment programs ask you to rate yourself as to whether you are conservative, moderate or aggressive.  However, they rarely define exactly how much risk you are taking in any of these categories. 

My company has developed a detailed questionnaire that helps us determine an investor’s risk tolerance and investment expectations.  We start the process by entering the answers into our sophisticated computer software.   After that, our experienced staff reviews the questionnaire and computer output in detail, and then we have a telephone consultation with our client to discuss the results and our recommendations. 

If you would be interested in knowing whether your risk tolerance is in line with your investment goals and expectations, click HERE to download a copy of our Confidential Investor Questionnaire.  Once completed, you can mail it back to us, fax it to us at (512) 263-3459 or complete it online and then send it to us via e-mail at [email protected].

Once you know your risk tolerance, it’s time to select some investments.   As I said above, I believe that mutual funds are the best alternative for beginning investors.  However, I will not mention any particular mutual fund or family of funds since doing so might be seen as an endorsement.

There are a number of fund families that offer low initial investment minimums as well as monthly investments via automatic withdrawals from your checking or savings account.  I have also included some websites to help you with mutual funds in the Resources section at the bottom of this E-Letter.

In order to find the best alternative, go to a source such as Morningstar’s website ( and seek out fund families with low minimum investments.  Then, it is important to review the available funds to select the best one for your situation.  Typically, you do not want to invest in last year’s top performer, since it is highly unlikely that that fund will repeat as the top performer in the next year.

Rather, you want to research a fund’s track record to see if it has consistent performance over a number of different time periods.  Consistent performance over three, five and ten years is far more important than one year of outstanding performance.  For example, if a fund has performed in the top half of its category over 1, 3, 5 or even 10 years, then chances are that it will continue to be a consistent performer in the future.  Of course, there is no guarantee that this will happen.

Once you are able to narrow your focus to a group of funds with consistent performance, it is important to check to see if the fund has had a recent manager change or if the fund is managed by a team.  The replacement of a sole manager could have negative effects on performance.

The next item to check is the amount of risk associated with this investment and compare it to your own risk tolerance.  There are various measures of risk used in the financial services industry, with standard deviation being the most common.  The annualized “standard deviation” is a tool that can estimate how much a fund may go up or down during any given year. 

There are other various measures of risk in addition to standard deviation, such as maximum drawdown (worst losing period), Sharpe Ratio, Ulcer Index, Morningstar Risk Rating, etc.  Explaining each of these would be too involved to go into in this E-Letter, but it will serve you well to become familiar with all of these measures of risk.  The Internet sites I have listed below all have helpful information to help educate you on risk.

Remember that historical statistics show only what an investment has done in the past, and the future could be very different.

You will also want to determine the level of fees charged by the fund.  Some mutual fund advisory services say you should only go with low-fee funds, and I agree with this if you are investing only in mutual funds that track an index like the S&P 500.  However, there are professionally managed funds with higher expense ratios that also provide returns that more than justify their increased fees.  So, don’t rule out a fund just because of fees, but make sure the manager is providing additional value for the higher level of fees charged.

Once you have determined the potential risk of a particular investment or portfolio of investments, you should compare that to your risk tolerance.  It is important that you not allow a high historical return to cloud your vision in regard to the risk you are taking to get that potential return.   Everyone wants an investment with 20% annual gains and no risk of loss, but such an investment doesn’t exist (despite what some of the Internet hucksters say).

After making your investment, it is also important to monitor it to make sure it stays within the risk and reward parameters you have set, and to make sure there are no manager changes that might affect future performance.   Investments are not a “set it and forget it” arrangement.   



I hope that this basic information will help you in your financial planning activities.  Always remember that financial planning is a process, not an event.  It requires continual monitoring and adjustment as time goes by and your personal situation changes. 

In this Internet age, there is no shortage of financial planning information, but you do have to be careful about the motives of those who bring it to you.  Much of the financial advice of today is driven by an ulterior motive of a product sale.  When financial advice is “customized” to fit a particular product sale, then it is suspect.

In the spirit of full disclosure, here is my ulterior motive.  Since I am in the investment advisory business, I have a desire to see as many of you become my clients as possible.  Thus, by providing this basic financial planning information, it is my desire that you follow it and someday reach a point where we can do business together. 

Since the programs I typically recommend have minimum investments of $50,000-$100,000 or more, that means that you will need to have become a successful saver and goal setter to be able to participate in these programs.   Thus, following this advice can result in a win-win situation for all of us. 

As I said in my first financial planning installment, it is important that you start your journey to financial independence NOW!  The sooner you start saving and investing, the more time you have for compound returns to work its magic for you.  For those of you who have already been following successful financial planning fundamentals and have accumulated a significant level of assets, you need to give us a call at 800-348-3601 so we can discuss how ProFutures can help you continue on the path to financial independence.

If you have any questions regarding any of the fundamental concepts I have listed, or if you need assistance when it comes time to diversify your investments, feel free to give us a call at 800-348-3601 and speak to one of our Investor Representatives.  You can also reach us by e-mail at [email protected].

Happy New Year!

As we come to the close of another year, I would like to wish each and every one of you a happy and prosperous New Year. 2004 was quite a ride with the transfer of power in Iraq, a spike in crude oil, a bitterly fought presidential election and the stock market uncertainty that accompanied all of these things. I hope my advice was beneficial to you during this year, and that you continue to read my E-Letter and forward it on to your friends and family.

2005 promises to another exciting year with the possibility of major changes to Social Security, tort reform, the potential retirement of Alan Greenspan and the continuing War on Terror. Here at the Forecasts & Trends E-Letter, we'll stay on top of these and other developments, and bring you our analysis. I appreciate all of you who read my E-Letter, and remember that I always welcome your comments and questions.

Very best regards,

Gary D. Halbert


"Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc. are not affiliated with nor do they endorse, sponsor or recommend any product or service advertised herein, unless otherwise specifically noted."

Forecasts & Trends is published by ProFutures, Inc., and Gary D. Halbert is the editor of this publication. Information contained herein is taken from sources believed to be reliable, but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgment of Gary D. Halbert and may change at any time without written notice, and ProFutures assumes no duty to update you regarding any changes. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Any references to products offered by Halbert Wealth Management are not a solicitation for any investment. Such offer or solicitation can only be made by way of Halbert Wealth Management’s Form ADV Part II, complete disclosures regarding the product and otherwise in accordance with applicable securities laws. Readers are urged to check with their investment counselors and review all disclosures before making a decision to invest. This electronic newsletter does not constitute an offer of sales of any securities. Gary D. Halbert, ProFutures, Inc. and all affiliated companies, InvestorsInsight, their officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Securities trading is speculative and involves the potential loss of investment. Past results are not necessarily indicative of future results.

Posted 12-28-2004 1:00 AM by Gary D. Halbert
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